* Your thoughts on this?…

September 30, 2015

The Honorable Bruce Rauner
Governor of Illinois
207 State House
Springfield, IL 62706

Dear Governor Rauner,

I am writing to underscore how the current budget stalemate adversely impacts the Illinois State Treasurer’s Office. Also, it is my responsibility to stress that if a resolution is not reached soon, there may be significant impacts to the state’s ability to pay its bills, run programs, and conduct essential government operations.

As you know, the Illinois Treasurer is the state’s Chief Investment and Banking Officer. Currently, my office manages approximately $23 billion, which includes $10.1 billion in state funds, $7.3 billion in college savings plans, and $5.5 billion on behalf of state agencies and municipalities. The Treasurer’s Office also oversees the Unclaimed Property program, administers the state’s multiple banking functions and financial services, and provides several low-interest loan and financial programs aimed at spurring economic growth, creating jobs, assisting farmers, and enhancing Illinois communities. Our primary focus remains preserving the state’s investment portfolio, providing the necessary liquidity to meet daily cash flow demands, and consistently producing investment earnings that enrich the people and communities of Illinois. To that end, the Treasurer’s Office returns $28 in revenue to the state for every $1 spent on operations.

While my office is committed to fulfilling its duties, the current budget impasse presents significant concerns and challenges that warrant your attention. As we approach the three month point of this budget stalemate, critically important banking and investment contracts remain unpaid which threaten to disrupt operations. If services from these vendors are suspended, there may be devastating effects on the state’s ability to manage its finances, pay its debts, and maximize returns for the people of Illinois.

I want to focus your attention on three specific areas of greatest concern:

1. Disruption of Banking Activities

In order to administer treasury, cash management, and investment operations on behalf of state and local governments, the Treasurer’s Office utilizes a wide variety of financial services and products from outside parties, including brokerage firms, securities dealers, investment consultants, banks, credit unions, and other financial institutions. These entities provide a number of critically important banking and investment services to the Treasurer’s Office. If funds are not available to pay our vendors, banking and financial services that we provide to state agencies may cease, such as: depository services, electronic payments, and lockbox services. State agencies would then not be able to deposit or accept checks, cash, or electronic funds, including federal funds. Further, our office may not be able to make funds available to the Comptroller which would not allow for vendor payments and payroll deposits.

2. Disruption of Investment Operations

Every day, the Treasurer’s Office actively invests and manages monies on behalf of state agencies and local governments. The largest portfolio, the State Portfolio, currently holds assets of approximately $10.1 billion. These monies are managed to provide the necessary liquidity to meet the state’s daily obligations. Remaining funds are placed in authorized short- and long-term investment vehicles.

While the majority of investments in the State Portfolio are positioned for quarter end, the Treasurer’s Office executes a number of daily and short-term trades to ensure sufficient liquidity. These activities could be severely jeopardized by any contractual disruptions. If the Treasurer’s Office is unable to pay contractual fees to banks and they terminate existing contracts and close investment and custodial accounts, our office may be forced to liquidate all investments due to the inability to hold securities with our custodian bank or the Federal Reserve. This may shut down our securities lending program which generates significant incremental income. In addition, security sales may need to be made in order to meet daily liquidity needs, something this office has never been forced to do in its 197-year history.

The Treasurer’s Office may have to sell off $10.1 billion in investments before our bank accounts close. As such, the State of Illinois may lose significant investment earnings and the potential loss of principal depending on market volatility. While it is imprudent to submit an exact figure considering the extensive variables in play, to provide some perspective, consider investment earnings under normal operations:

• The State Portfolio typically earns $3.5-$5 million in monthly earnings ($4.2 million in August 2015) or $42-$60 million in annual investment earnings.

• The Treasurer’s Office currently earns approximately $33,000 per day ($800,000 to $1.3 million per month) in securities lending income. If the Treasurer’s Office cannot replace treasury securities or called securities, securities lending income will be adversely impacted.

3. Risks to Agencies Upgrading to Chip-Card Payment Systems

October 1, 2015, is the deadline for organizations that accept credit card payments to adopt a new microchip processing system. Failure to do so may result in a liability shift that renders them financially responsible for fraudulent charges. This applies to state and local government agencies as well. The liability shift compels businesses and organizations to purchase new terminals and software that read E.M.V. (Europay, MasterCard, and VISA) microchips.

The Treasurer’s Office has been working for months with state and local agencies to prepare for this transition to newer technology. However, there may be agencies that are not ready for this transition as they lack the appropriation authority to purchase the required terminals. This is unnecessarily exposing the state to risks and could create a significant liability for already stretched government agencies.

The Treasurer’s Office will continue to work to forestall these impacts while considering contingencies if our vendors discontinue services. My office will keep you abreast of any pertinent developments, and should you have any questions, please do not hesitate to contact us.

Thank you for your time and attention to these important matters.

Sincerely,

Michael W. Frerichs
Illinois State Treasurer

Cc: Senate President John Cullerton
House Speaker Michael Madigan
Senate Republican Leader Christine Radogno
House Republican Leader Jim Durkin
Lieutenant Governor Evelyn Sanguinetti
Attorney General Lisa Madigan
Secretary of State Jesse White
Comptroller Leslie Geissler Munger